Millions of taxpayers face record bills as thresholds and allowances remain unchanged for years, dragging rising numbers into the tax net. HM Revenue & Customs collected £82.5 billion last month – the highest ever tax haul for the month of July.
Workers paid £32.7 billion in income tax – also a record for July – and families paid £749 million in inheritance tax – the second highest month on record.
So, it is worth ensuring that you are paying no more than you need. There are many ways to significantly reduce your tax bill that aren’t well publicised. You could be missing out on tax rebates or paying higher bills than necessary unless you know about these tax-saving tricks.
1. Claim tax back on pension contributions
An estimated one in three higher rate taxpayers saving into a private pension do not claim the extra tax relief due to them on their pension savings.
While the basic rate tax you have paid on your pension contributions is added into your pension pot automatically, those who pay tax at a higher rate may have to claim back the extra tax paid.
A higher-rate taxpayer who pays £10,000 a year into a private pension misses out on £2,500 of tax relief by not claiming this.
An estimated one in three higher rate taxpayers saving into a private pension do not claim the extra tax relief due to them on their pension savings
Figures from DIY investment platform Interactive Investor suggest that those who fail to get this tax relief could miss out on £122,000 of pension income over 20 years, compared with someone who reinvested this extra money into their pension.
Most people will find it easiest to reclaim these contributions by filling in a Self-Assessment tax return, especially if their contributions change each year.
However, you can also write to HMRC and ask for an adjustment in your tax code to claim the relief. You can backdate your claim for four tax years.
2. Claim on items given to charity
Donations to charity should be free of income tax. If you are a taxpayer, the charity itself should claim the tax back, which automatically boosts the amount that it receives. You will need to fill in a Gift Aid form, on which you confirm you are a taxpayer and happy for the charity to go ahead.
However, charities can only claim back the basic rate of tax. If you are a higher or additional rate taxpayer, you can claim back the difference yourself.
Either note on your tax return how much you have given to charity or contact HMRC directly to claim it.
An estimated £560million of Gift Aid goes unclaimed each year and, in some cases, you can also claim for the cost of items you’ve donated to a charity shop
An estimated £560million of Gift Aid goes unclaimed each year.
Don’t forget you may be able to claim on annual memberships to charities such as the National Trust and English Heritage.
In some cases, you can also claim for the cost of items you’ve donated to a charity shop, if you’ve signed the correct Gift Aid declarations, and the shop has sold the items on your behalf and treated them as a donation.
3. Make £7,500 tax free renting out a room
Fancy making £7,500 tax free? If you have a spare room, the Rent a Room allowance means you can do that, whether you rent it out full time, offer bed and breakfast services at certain times of the year or provide student lodging.
To be eligible for the tax break, you must be living in the home and share facilities with your lodger. The room must be furnished, and it should be lived in, rather than, for example, used as an office.
If you make less than £7,500 a year, you do not have to declare it to HMRC. If you make more than this, you must declare it, but you will still be able to receive the £7,500 allowance.
If you have a spare room, the Rent a Room allowance means you can make up to £7,500 free from tax
4. Pensions, bikes, cars, and childcare
You can cut the cost of some items if your employer offers a salary sacrifice scheme. This involves agreeing a lower salary in cash terms in exchange for a benefit of the same value.
The advantage is that the benefits are received free of National Insurance and income tax.
For example, paying for a new bike using salary sacrifice can cut the cost by around 30 per cent if you’re a basic-rate taxpayer, the retailer Evans Cycles calculates.
Childcare vouchers for children up to their 15th birthday can be paid for in this way – saving up to £900 a year – but such schemes are only available to existing members. Other items that can be bought through salary sacrifice, including petrol cars and gym memberships, require you to pay tax, as these are counted as a ‘benefit in kind’. Electric vehicle leasing is also counted, but the charge is just two per cent.
You may be able to make your pension contributions through salary sacrifice to save National Insurance on them. Employers also save through these schemes as they do not have to pay employers’ National Insurance on this portion of your salary.
Paying for a new bike using the salary sacrifice scheme can cut the cost by around 30 per cent if you’re a basic-rate taxpayer
Some may hand you their saving as well, while others keep it for themselves. Larger employers are most likely to offer salary sacrifice schemes, but it is worth asking to check if yours does.
Your employer should also make available information to help you decide if it’s right for you.
The biggest drawback of salary sacrifice schemes is that they reduce your headline salary.
This may mean that you might get a lower payout if made redundant while some mortgage lenders could offer you lower loans as it looks as if you earn less.
5. Earn on property, Vinted, eBay and Etsy
You can also make £1,000 income elsewhere from your property without paying any tax.
That means you could rent out your driveway, rent a room to someone to use as an office, or make money by using your house as a film set without paying any tax.
In addition, a further ‘trading allowance’ means you can make £1,000 from a side hustle like selling on Etsy, Vinted or eBay without paying any tax on the money you make. Make any more than this, though, and you must inform the taxman.
A ‘trading allowance’ means you can make £1,000 from a side hustle such as selling on Etsy, Vinted or eBay without paying any tax on the money you make
6. Save on memberships and subscriptions
If you need to be a member of a professional body to carry out your job, you can offset the membership cost against tax, if that body is on an ‘approved list’ held by the tax office.
Check the HMRC website here to see whether yours is on the list.
If so, you can claim back the cost via your Self-Assessment tax return. Or, if you do not fill one in, you can claim online on the government website.
Check the HMRC website to see if you can claim back on your Self-Assessment tax return
7. Claim tax back if you’re married
Save £252 in tax every year if you or your spouse earns between £12,570 and £50,270 a year and the other earns less than the tax-free personal allowance.
The Marriage Allowance enables those eligible to transfer £1,260 of the lower earner’s annual tax-free Personal Allowance to their husband/wife or civil partner, saving tax in the process.
You can apply for this online (gov.uk/apply-marriage-allowance), and you can backdate claims for up to four years.
You can save £252 in tax every year if you or your spouse earns between £12,570 and £50,270 a year and the other earns less than the tax-free personal allowance
8. Claim for washing your work clothes
If you wear a uniform to work, you can claim a tax rebate on washing, repair, and replacement. This is the case whether it is a branded T-shirt, a nurse’s scrubs, or a pilot’s uniform.
Even if you only wear the uniform for one day in the tax year, if a person in the street would recognise where you worked from the uniform you wear, HMRC says you can claim.
The standard allowance for this is £60, meaning that you’ll get back the tax paid on £60 of your income when you claim – £24 for a higher-rate taxpayer and £12 for a basic-rate payer.
Some professions, such as the ambulance service, will get more.
You can backdate your claim for four years, too, on the HMRC website. There’s a full list here of the different allowances for different professions: gov.uk/guidance/job-expenses-for-uniforms-work-clothing-and-tools.
If you wear a uniform to work, you can claim a tax rebate on washing, repair and replacement – no matter the clothes
And don’t fall into the dividends trap that’s snaring more investors than ever before…
Taxpayers are being squeezed on all fronts – on everything from incomes to inheritances – and investment profits are no exception.
The number of shareholders being hit by dividend tax has almost doubled in the past three years, with 3.6 million on track to pay this tax year.
And it’s only going to get worse, with thousands more dragged into paying the duty for the first time.
HM Revenue & Customs expects to rake in almost £18 billion in dividend taxes this tax year, after allowances were slashed in half this April, official figures obtained by investment platform AJ Bell reveal.
The amount you can earn in dividend income has been reduced in successive cuts, falling most recently from £1,000 to £500 four months ago under the Conservative government. The new allowance is just a tenth of the £5,000 available at its height during the 2017-2018 tax year.
More than three times the number of basic-rate taxpayers are set to pay dividend tax compared with three years ago.
Laith Khalaf, head of investment analysis at AJ Bell, says it will be particularly ‘frustrating’ for those who will have just breached the dividend allowance, as they will now have to file a tax return for a ‘piddling amount of tax’.
But with careful planning, it is possible to shield your hard-earned money and avoid paying the tax.
Here are the key steps experts recommend taking if you want to protect your investments without losing out on dividend income.
One of the most straightforward ways of sheltering your money is making use of tax-efficient investment accounts.
You can save up to £20,000 a year into a stocks and shares Individual Savings Account (Isa) and you will never have to pay tax on your dividends or returns, protecting every penny from the taxman.
If you already have investments that you would like to transfer into an Isa, you can use a process called ‘Bed and Isa’. This involves selling investments in a general investment or trading account, such as shares, funds or investment trusts, that are not sheltered from tax, and buying them straight back within a stocks and shares Isa.
From then on, the investments will be fully sheltered from tax. You will typically need a general investment account and Isa with one investment platform, which will complete the transfer for you. There will be a charge, but rather than paying separate fees for the sale and the purchase, you should only pay a single dealing charge.
Khalaf warns: ‘This does crystallise any gains you’ve made on those investments though, which will count towards your capital gains tax allowance (currently £3,000) and could result in a capital gains tax charge if your profits exceed that amount.’
Diverting your savings into a pension instead of an investment account can also be hugely beneficial, says Kevin O’Shea, of wealth manager RBC Wealth Management.
You receive tax relief on anything you pay in up to the £60,000 annual allowance.
As with Isas, dividends you earn in a workplace or self-invested personal pension (Sipp) are not subject to tax and will not count towards your £500 dividend allowance.
However, you will not be able to access money in your pension until age 55, rising to 57 from April 2028.
Taxpayers are being squeezed on all fronts – on everything from incomes to inheritances – and investment profits are no exception
If you want to transfer your investments into a Sipp you can also do a ‘Bed and Sipp’ to shield them from dividend tax by selling them and buying them back within a pension. Again, this potentially raises a capital gain tax liability if your annual gains exceed £3,000, Khalaf warns.
He estimates that investors can hold £14,285 in a passive fund that tracks the FTSE All Share – the UK market – before reaching their £500 dividend allowance. The market yields around 3.5 per cent, he says.
Of course, that value and the dividends paid will fluctuate over time, probably trending upwards and requiring further action. However, if you have a larger investment fund, then it may be worth considering shielding it from tax. There may be an easy solution for married couples and civil partners – they can transfer investments to one another without having to pay capital gains tax. If one partner isn’t using their dividend allowance then they can double the amount they can earn before paying tax. Similarly, if they have not used up their £20,000 Isa allowance, an investment portfolio can be split between two Isa accounts.
Khalaf says: ‘It can be especially effective when one partner has large dividend payments which are pushing them up into a higher tax band. Transfers of investments between spouses or civil partners can be done by simply changing the ownership of the investments rather than selling them, which could raise a capital gains tax liability.’
Certain types of investments come with tax perks, including Enterprise Investment Schemes (EIS), which encourage investors to back new businesses that are only just finding their feet. But, as the businesses are in their early stages, investing in them is high risk. So, in return for taking a risk, investors receive generous tax breaks, including income tax relief, capital gains tax relief and even inheritance tax relief on some businesses.
This is also the case for Venture Capital Trusts, where dividends received by investors are exempt from income tax.